Can Vermont's Single-Payer System Fix What Ails American Healthcare?

By Sean McElwee

The Affordable Care Act's turbulent implementation has ruled the news cycle, but across the country states like Vermont are experimenting with their own plans.

Governor Peter Shumlin signed a revolutionary single-payer plan, Green Mountain Healthcare—the culmination of decades of work by progressive politicians in the state—into law in May 2011. The new system aims to guarantee universal insurance coverage, improve benefits for those who are currently underinsured, include universal dental care and vision care, and increase the Medicaid reimbursement rate to doctors in order to avoid cost-shifting.

"God didn’t create the fact that employers are responsible for healthcare for their employees," says Bernie Sanders.

In some ways, the system resembles the ACA, but the the most consequential difference is that Vermont’s law will end employer-provided insurance. "God didn’t create the fact that employers are responsible for healthcare for their employees," says Bernie Sanders, the state’s stalwart socialist senator.

Yet that change has resulted in an echo of the problems Obamacare has faced in remaking the individual insurance market: Plenty of people aren’t happy about giving up existing insurance that they like.

Meanwhile, there are still major question marks about how Vermont will pay for the plan, whether it can achieve the projected savings, and what might happen when an American state tries to import a European-style insurance program. If the ambitious Green Mountain Healthcare is a success, its backers say it will serve as a model for the rest of the nation—especially if the ACA doesn’t achieve full coverage and help bring costs down. Then, they say, statehouses around the nation will look to Montpelier for guidance. But first Vermont has to figure out how the plan is going to work.

William Hsiao projected that the greatest savings in Vermont's plan would come from unifying the payment system. (Sean McElwee)

The program was designed by Harvard economist William Hsiao, who detailed the plain in a 2011 Health Affairsarticle. Hsiao projected the state would save 25.3 percent annually in total healthcare spending, lower household and employer healthcare spending, job growth, and higher economic output for the state. The savings would come from lower administrative expenses, reduced fraud and abuse, eliminating middlemen, malpractice reform, and governance improvements. These savings, about $4.6 billion over the first five years, would be plowed back into paying to cover the uninsured and expanding benefits and services leaving $2.3 billion in residual savings. The law also created the Green Mountain Care Board, an independent group charged with overseeing the law and ensuring quality. What the plan didn’t do is lay out how the state government would pay for its increased spending.

A projection of how Vermont would spend savings, based on William Hsiao's blueprint. (Sean McElwee)

But Vermont has already deviated from Hsiao’s blueprint. The state’s new tort-reform law is not as expansive as he had envisioned. The state is still working through the best system to raise revenues, and Shumlin has appointed a tax expert to work on some plans. Cost-containment pilot projects to reform payment and delivery systems recommended by the Green Mountain Care Board are beginning to roll out. The state has yet to finalize its proposals for raising revenues to fund the program, which the legislature will consider in 2015 and contract out the administrative duties through a competitive bidding process closer to 2017 when the plan is ready to implement.

Complicating the revenue project, the plan’s cost is disputed. A University of Massachusetts study commissioned by the administration to determine the cost of the plan estimated Vermont would need to find $1.6 billion in new revenues to fund the plan in 2017. Though the state will end up paying much more, UMass’s study also estimated GMC would save $281 million between 2017 and 2019 by reducing administrative costs and slowing growth in costs. The new system would eliminate the myriad providers currently in the state, and instead enroll nearly all of Vermont’s citizens in GMC. The UMass study estimates that about 70,000 Vermonters, roughly 10 percent of the population, would continue to receive insurance from their employers, the Veterans Affairs Administration, or their federal government plan. GMC would supplement that insurance.

Under Vermont’s existing system, individuals and their employers pay $2.2 billion each year, which will be reduced to just $332 million. Even with $249 million in federal funds for Medicaid, that leaves a $1.6 billion shortfall that must be made up with increased government revenues. And that’s the more conservative estimate. A recent report by Avalere, a healthcare advisory company, commissioned by Vermont Partners for Health Care Reform, a confederation of hospital, insurance, and business groups, found the UMass study may have understated the cost of the plan and estimates the state will need between $1.9 and $2.2 billion in new revenues. The Avalere report uses different assumptions for administrative savings and payment rates, arguing that the UMass estimate—that GMC will pay 105 percent of Medicare rates—may be too low and would drive providers to leave the state.

Vermont’s plan is a experiment in whether the government can convince humans, naturally risk-averse, to drop their wariness about changes that might affect their access to healthcare.

“The good news about the Avalere report is even if you take their assumptions, it still shows that we can cover everyone, bring everyone up to a better on-average benefit level as what they have today and spend the same or less money,” says Robin Lunge, Vermont’s director of healthcare reform.

While the national individual health market is both viewed as inefficient by experts and wildly unpopular with most users, its overhaul has still caused uproar. That could be a bad omen for Vermont, which is upending the far more popular employer-sponsored healthcare system.

But one of the advantages of Vermont’s small population may be a tolerance for disruption. “Vermont is a small state, says Sara Solnick, chair of economics at the University of Vermont. “There are very few degrees of separation so people are more willing to do something for everyone’s good for the good of the state.”

Testing the Public's Appetite for Change

Vermont’s plan is a bold experiment in whether the government can convince humans, naturally risk-averse, to drop their wariness about changes that might affect their access to healthcare.

“At the national level we haven’t had that discussion because it’s politically impossible,” says Jonathan Gruber, an MIT economist who worked with Hsiao during the early stages of the initiative, and who also worked on the Affordable Care Act and Massachusetts’ universal-coverage plan. “I am a fan of experimentation. We learned a lot experimenting with one model in Massachusetts and I think we can learn a lot experimenting with another model in Vermont.”

While the bounds of the ACA were tightly circumscribed by political realities, Vermont—a state with a homogenous and reliably Democratic population—has more latitude. But even now, Gruber says the proposals are still protean: “There is no Vermont plan. There are Vermont ideas, but there is no Vermont plan.”

That has led to major challenges on several fronts: medical providers, businesses, and most of all the general public.

Darcie Johnston, a Republican political operative who runs Vermonters for Health Care Freedom, calls the GMC the largest tax increase in state history—even though taxes haven’t actually increased yet—and worries the cost-containment measures Hsiao and Shumlin counted on will fail and the savings will never materialize. She notes that the legislature failed to pass comprehensive tort reform (which accounted for 8 percent of the savings) and says she fears the plan will drive doctors to reduce care or even leave the state. Recent research suggests the fear may be unfounded. Doctors often threaten to opt out of Medicare, but few follow through. In Britain, where nearly all doctors and nurses are employed by the government, medical programs continue to attract students, even as other programs flounder.

But the state’s business community—including groups that support reform—worries about the tax increases that will fund the plan. Sanders argues the new system will actually be a major relief to businesses, which will see an increased tax burden but won’t have to spend vast sums to paying for their employees’ insurance and administer the benefits. The plan amounts to a cost-shift. What businesses once paid in premiums, they will now pay in taxes. Hsiao forecast that cost per employee would drop nearly $1,900, from $2,228 to $332.

While perhaps only a small, homogeneous state could pass a plan like Vermont's, there are also challenges a single state faces in implementing it that a nation would not.

The paradox of Vermont’s peculiar politics is that while perhaps only a small, homogeneous state could pass a plan like Green Mountain Care, there are also challenges a single state faces in implementing it that a nation would not. Single-payer can work at the national level, but what about Vermonters who work over state lines, or corporations based in other states doing business in Vermont?

For the plan’s defenders, the best counterexample is to the north. “Canada’s healthcare system began as province-by-province initiative as well,” Lunge notes. “It started at Saskatchewan before becoming a national initiative.”

And just as the Saskatchewan plan became a model for Canada, many in Vermont, including Sanders, hope the state’s plan will eventually become an example for other states. “Americans want to see a model that works,” the senator says. “If Vermont can be that model it will have a profound impact on discourse in this country.”

If Vermont can work through the legal, technical, and administrative complications, it will be easier for others to follow. Lunge told me legislators in other states have called to ask about the system. “There are a number of states that have expressed interest. They have said to me that if ‘you figure this out, that will give us an opportunity,’” she says.

Vermont Health Connect, the state’s insurance exchange, opened October 1 and faced problems similar to the federal government’s system. Since then, Vermont has managed to fix some of its flaws, though it has also criticized its contractor on the project. The launch is phased, so customers can currently choose a plan, but the payment function has not yet finished testing.

The late launch of the payment system, which has been decried by critics, may be a symbol of the administration's willingness to work with small businesses and customers, who were unwilling to pay for health insurance they would receive in January in October. Either way, the next few months will be crucial, because all individuals and businesses with fewer than 50 employees have to obtain coverage through the exchange by March 31.

A Need for Reform, Nationwide

Vermont’s enigmatic political preferences have baffled political scientists for decades. The state voted Republican in every presidential election for over 100 years, the longest streak in history (1854 to 1963), and had no Democratic governors during that span. Now its home to the nation’s only socialist senator, and after Barack Obama’s home state of Hawaii, no state voted for the president by a larger margin.

Arthur Woolf, an associate professor of economics at the University of Vermont, says the state “is very much like a Social Democratic Western European country,” both economically (because of its equality and prosperity) and demographically (because of its homogeneous population). So perhaps it’s not surprising that the state is also the first to explore a Canadian-style single-payer system. Sanders says, “When I was mayor of Burlington in 1981 we had a commission, we had a lot of discussion, we had town meetings, we brought in people from Canada.” That attempt came to naught, but 30 years later, a Democratic House, Senate, and governor and strong popular support produced a perfect opportunity to pass a major reform. But of course Vermont’s unique political system might make it hard for other states to replicate its single-payer system.

Despite the setbacks for Green Mountain Care, the economic rationale for a single-payer system remains strong. The U.S. healthcare system is dreadfully inefficient and exists in its current condition largely because of path dependency, not its merits. In his seminal 1963 paper, “Uncertainty and the Welfare Economics of Medical Care,” Kenneth Arrow noted the features of the healthcare market that made laissez-faire untenable. The sector is rife with market failures—externalities, asymmetric information, time-inconsistent preferences, and principal-agent dilemmas. As Paul Krugman writes, “There are … no examples of successful health care based on the principles of the free market, for one simple reason: in health care, the free market just doesn’t work.”

A 2012 Institute of Medicine report finds that the U.S. healthcare system wastes $750 billion each year. A study published in the Journal of the American Medical Association found, “Among 34 OECD countries between 1990 and 2010, the U.S. rank for the age-standardized death rate changed from 18th to 27th, for the age-standardized YLL [Years of Potential Life Lost] rate from 23rd to 28th, for the age-standardized years lived with disability rate from 5th to 6th, for life expectancy at birth from 20th to 27th, and for healthy life expectancy from 14th to 26th.” OECD countries pay half of what the U.S. does, in per capita terms, for better outcomes and universal coverage.

If Vermont can slay the chimera of employer-based healthcare, governors across the nation will take notice. “The single-payer model is harder, it requires more change, but it also holds out more hope because it has the best opportunity to control costs and everyone wants to control costs,” Solnick says.

The U.S. healthcare system is in dire need of reform. In a 1928 in Vermont, Calvin Coolidge declared, “I love Vermont because of her hills and valleys, her scenery and invigorating climate, but most of all because of her indomitable people. They are a race of pioneers who have almost beggared themselves to serve others.”